2013 Could Be the Year Japan's Economy Turns Around: Economist

So much for the lost decade. Despite an economy in recession and a government debt burden twice the size of its GDP, Japan's stock market rallied 23% last year--its biggest gain since 2005 and more than twice the profit in U.S. stocks.

"Japan had disappointed so many times in the past when there were reasons to hope for a recovery from several decades of depressed markets and deflation," writes Bill Witherell, chief global economist at Cumberland Advisors, in a recent commentary.

But this year will be different, Witherell tells The Daily Ticker. "This year we have a new government..a government that's committed to really do something dramatic to get the economy turned around."

Witherell says the Japanese government wants to reduce the value of the yen and implement a large fiscal stimulus. The yen recently fell to a two-year low and could fall further, says Witherell, noting that a weaker yen will help exports.

He tells The Daily Ticker that Prime Minister Shinzo Abe who was elected late last month has enough of a majority in the lower house "to get him going on [stimulus] spending."

That stimulus could be extended if his Liberal Democratic Party wins a majority in the upper house the July elections. "He will want to see early results for the economy to help that election along for him," says Witherell.

Another item on Abe's wish list: a more aggressive monetary policy. "Abe is applying political pressure on the Bank [of Japan] …and will be appointing a new governor and one other new member. That pretty much assures that the bank will be moving toward significantly more active stimulation of the economy through quantitative easing…buying foreign bonds to get the value of the yen down further than it already already dropped," says Witherell. He says the yen, which closed most recently at 87 to the dollar, could fall to 90 to 100 this year."

In the meantime Witherell recommends that investors interested in profiting from a Japanese turnaround buy Japanese stock ETFs including EWJ, the iShares dollar-denominated Japanese stock ETF which tracks the MSCI Japan index. That ETF, however, won't benefit directly from the decline of the yen. To get that benefit, Witherell recommends DXJ, the Wisdom Tree Japan Hedged Equity ETF, which rose more than 17% last year compared to 7% for the iShares Japan stock ETF.

Witherell cautions there are risks to investing in Japanese assets. "Japan will be adding to its debt which is already extremely high," says Witherell and that could spook government bond investors. The ratio of Japanese debt to GDP is near 200%--twice the ratio in the U.S.